Method 2, Residual Income Model: Find or estimate the EPS growth rate. Find book value per share on the balance sheet. Use the discount rate k from part a or b above and estimate the value of your stock according to residual income model of chapter 6. RIM can provide weird estimation. Dont worry if you get crazy estimate. Method 3: Price Ratio Analysis (Problem 21 of Ch 6) A. P/E ratio: Find or estimate the EPS growth rate or g. (You can use the same EPS growth rate from part a or b.) Predict next years EPS. Then stock price using relative valuation method = Historical P/E * ESP1 (Use the average or historical P/E ratio). http://bigcharts.marketwatch.com And under interactive charts and advanced chart (Lower indicator) you can plot The P/E ratio. If you chose 10 year chart, you can get approximate average P/E from the lower chart. I would get the average or historical ratios from Morningstar.com B. P/CF ratio: Find or estimate the CFPS growth rate. Predict next years CFPS. (You can use Cash from Operations on the Cash Flow Statement to approximate operating cash flow.) Then predict stock price using the average P/CF ratio. You could get historical ratios from Morningstar.com. Could also use bigcharts.com C. P/S ratio: Find or estimate the SPS growth rate. Predict next years SPS. Then predict stock price using the average P/S ratio. 4. Now for the fun part! You now have as many as five different estimates for the stock you have chosen. Compare your estimates of stock value to the current actual stock price. Make a prediction about whether the stock is underpriced or overpriced (i.e. whether you should buy it or short it).

For the Microsoft Corp. Inc. (MSFT)